Three Stages of Money Laundering
Now that you understand what money laundering is, let's look at how it actually works. The process follows three distinct stages.
The Three Stages
| Stage | Name | What Happens | Example |
|---|---|---|---|
| Stage 1 | Placement | Illegally obtained cash is introduced into the financial system | Depositing cash into a bank account in amounts under $10,000 to avoid reporting (structuring) |
| Stage 2 | Layering | Complex transactions designed to separate the money from its illegal source | Moving funds through multiple accounts, shell companies, or foreign banks |
| Stage 3 | Integration | "Clean" money is reintroduced into the legitimate economy | Purchasing real estate, businesses, or securities with the laundered funds |
Think of it this way: Imagine smuggling mud into a swimming pool. Placement is dumping the mud in. Layering is stirring the water until you can no longer tell where the mud went. Integration is scooping out water that now looks clean and using it freely.
Stage 1: Placement
- The most vulnerable stage for detection because it involves physical cash
- Structuring (also called "smurfing") is the most common placement technique
- Deliberately breaking up large cash deposits into smaller amounts (under $10,000) to avoid Currency Transaction Report (CTR) filing
- Structuring is itself illegal, even if the underlying funds are legitimate
- Other placement methods include:
- Purchasing money orders or cashier's checks with cash
- Commingling illegal funds with cash from a legitimate business
- Physically smuggling cash to another country
Exam Tip: Gotchas
- Structuring is a placement technique, not layering. It happens when cash first enters the system.
- Structuring is illegal even if the money is legitimate. The act of breaking up deposits to dodge reporting is itself a crime.
Stage 2: Layering
- The most complex stage; designed to create confusion and obscure the money trail
- Common layering techniques in the securities industry:
- Buying and selling securities through multiple brokerage accounts
- Transferring funds through shell companies in different jurisdictions
- Converting cash into financial instruments (stocks, bonds, derivatives)
- Wire transfers between accounts in different countries
- The more layers and complexity, the harder it is to trace the money back to its criminal origin
Exam Tip: Gotchas
- A customer rapidly buying and selling securities through multiple accounts is layering, not integration. The goal is to create confusion, not to spend the money.
Stage 3: Integration
- The final stage where "cleaned" money re-enters the legitimate economy
- At this point, the funds appear to come from legal sources
- Common integration methods:
- Purchasing real estate, luxury goods, or businesses
- Making investments that generate seemingly legitimate returns
- Using funds as collateral for loans
- Detection at this stage is the most difficult because the money trail has been thoroughly obscured
Exam Tip: Gotchas
- Integration is the hardest stage to detect because the money already looks legitimate by this point.
How This Connects to AML Compliance
Understanding these stages explains why broker-dealers must:
- Monitor new accounts (catches placement attempts)
- Flag unusual trading patterns (catches layering activity)
- Know their customers (makes integration harder to pull off)
Think of it this way: The three stages follow the logic of doing laundry. You put dirty clothes in the machine (placement), run them through cycles to clean them (layering), then take them out looking fresh and ready to wear (integration). Dirty money in, spin it around, clean money out.